GST on health, term insurance may be scrapped or cut to 5%

The Goods and Services Tax (GST) reforms expected around Diwali this year could likely lead to scrapping of the tax on insurance policies — or at least a calibrated reduction to 5 per cent — making insurance more affordable, improving financial security for millions and accelerating insurance penetration in India.

The long-anticipated reduction in GST on insurance is under active consideration by the government, although it is expected to result in annual revenue loss of approximately Rs 17,000 crore, said a source.

There is a worry, however, among insurance companies that they will lose the input tax credit (ITC) claim if the GST is completely abolished, which will push up operating costs for insurers.

Industry veterans have long criticised the 18 per cent on health, term and ULIP insurance premiums, particularly for health and term life insurance, as a deterrent to wider insurance adoption in India. If the government were to abolish this tax or bring it down to 5 per cent, the move could have far-reaching consequences — not only for customers and insurance companies, but also for public health and financial inclusion in India.

According to Narendra Bharindwal, president, Insurance Brokers Association of India (IBAI), the proposal to scrap GST on insurance would reduce the cost of premiums for policy-holders, thereby improving affordability and encouraging greater penetration of insurance across life, health and general insurance segments. “From a policy-holder’s perspective, this is a welcome move that aligns with the national vision of ‘insurance for all by 2047’,” Bharindwal said.

 

For policy-holders, GST reduction or exemption will make insurance more affordable, especially in retail health and micro-insurance, directly benefiting the masses. For example, if a family health insurance plan costs Rs 50,000 annually, the policy-holder ends up paying Rs 59,000 including GST. For term insurance, where affordability is a major selling point, GST abolition could make basic life coverage more accessible to lakhs of low- and middle-income families.

Insurers say that lower premiums directly translate into better affordability and greater coverage, particularly for first-time buyers who often hesitate due to the added tax burden.

“For starters, the speculation is that the changes would be on the life insurance side and not the general insurance side. Based on that assumption, for retail consumers, I think it’s a step in the right direction. When you reduce or take away the burden on the consumer to the extent of 18 per cent for a service, especially when that service is being taken through the disposable income after tax, it’s bound to increase the penetration,” said Abhijit A Sethi, Chief Operating Officer, Howden (India).

India has historically struggled with low insurance penetration – it was 3.7 per cent in 2023-24, and 4 per cent in 2022-23. The insurance penetration for life insurance industry declined marginally to 2.8 per cent in 2023-24, from 3 per cent the previous year. The penetration for non-life insurance industry remained the same – 1 per cent in 2023-24 and 2022-23 — according to insurance regulator IRDAI’s Annual Report for FY24.

“The government should also check the spiralling medical inflation which is adding to health insurance premium. This is now around 14 per cent. It should bring a regulator for the healthcare sector and uniformity in hospital expenses. Customers will really benefit and the premium will become stable,” said an official of an insurance company. “With rising medical costs and increasing awareness post-Covid, health insurance is slowly becoming a necessity rather than an option. However, high premiums continue to be a barrier for many people in rural and semi-urban areas. A zero-GST regime could act as a policy nudge, encouraging more people to opt for health insurance.”

Industry insiders say that removing GST would likely lead to a spike in first-time policy-holders, especially among the younger, under-insured population. More individuals and families may also upgrade from basic coverage to more comprehensive plans.

This shift would not only reduce the healthcare burden on individuals but also help the government move toward its goal of universal health coverage. For the government, a lower GST will encourage penetration, expand the policy-holder base and, in the medium-to-long term, increase overall tax collections due to growth in the industry, said an insurance official.

Non-life insurance segment mobilised a premium of Rs 3.07 lakh crore, up by 6.21 per cent, in FY25. Life insurers collected Rs 3.97 lakh crore premium in FY25, an increase of 5.13 per cent.

Input tax credit worthy

Insurance companies are concerned that a zero GST regime could lead to a rise in operating costs. Bharindwal of IBAI said to avail ITC, there has to be a GST component (even if it is at 5 per cent or lower). “A complete exemption (nil GST) would block ITC, while a reduced rate of 5 per cent would still allow a set-off. Hence, from an industry operations perspective, a reduction in GST rate (say to 5 per cent) may be more practical than a complete exemption,” he said.

As a nil GST is likely to impact the balance sheets of insurance companies, 5 per cent will be ideal from the industry point of view, said a top official of an insurance firm. He said a complete exemption may increase input costs as ITC will not be available. A calibrated reduction (to 5 per cent) may strike a balance – ensuring affordability for customers while retaining ITC benefits for industry players.

ITC is a mechanism under the GST system that allows businesses to claim credit for the tax paid on purchases (inputs) used to make taxable supplies (outputs). Put simply, when a company buys goods or services for your business, it pays GST on those purchases (inputs). Later, when it sells the products or services, it collects GST from its customers. The company can reduce the tax it pays on sales by claiming credit for the tax paid on purchases.

In summary, while nil GST will certainly benefit customers, a moderate GST rate with ITC retention could be a more sustainable solution for the industry, Bharindwal said.

Source:: The Indian Express,  dated 19/08/2025.